The present invention relates to the insurance field, and in particular to a return-of-premium insurance system and method applicable to specific types of insurance.
Most of the standard insurance policies available today fall into one of two broad classes. The first class of insurance is usually referred to within the insurance field as “life and health,” while the second class is referred to as “property and casualty.” The life and health insurance field may include, but is not limited to, whole life insurance, term life insurance, fixed- and variable-rate annuities, guaranteed interest policies, equity indexed annuities, funeral insurance, credit life and disability, individual and group health, disability income, long-term care, medical supplements, supplemental benefits, and health maintenance organizations (HMOs). The property and casualty insurance field may include, but is not limited to, homeowners insurance, renters insurance, automotive insurance, directors and officers insurance, and professional malpractice insurance. These two classes of insurance are distinct from each other in many ways, and, recognizing these distinctions, most states require separate licenses for insurance agents working in these fields. Many states also dedicate separate divisions within their insurance regulatory departments to regulate these two different classes of insurance. Although a single agent can receive licenses in both fields, it is more common for an agent to specialize in one field or the other, due to the significant differences between the knowledge and skills necessary to provide agent services in these distinct fields.
One way to distinguish between these types of insurance is to recognize that life and health insurance is generally an optional form of insurance, but property and casualty insurance may often be considered required for the policyholder. By optional it is meant that the decision to purchase this type of insurance, as well as the details concerning the policy, are within the discretion of the policyholder, and such policies are sometimes required by a third party, for example, to fund a buy-and-sell agreement or key-man insurance. The policyholder purchases life and health insurance voluntarily, based on a personal decision about a perceived need. By contrast, a person may often be required to purchase various forms of property and casualty insurance, and the policy particulars, or at least the policy coverage minimums, may be set forth as required parameters. For example, automobile liability insurance is generally required by state law, which sets forth certain minimum requirements that the policy must contain by all automobile owners and licensed drivers. While the policyholder is free to choose more comprehensive coverage than the minimums mandated by law, he or she must purchase coverage that at least meets the minimum requirements. Likewise, homeowners insurance is typically required by lenders for a party that is seeking a mortgage in order to purchase a home. In this case as well, the lender will generally provide minimum requirements for the homeowners insurance that must be purchased by the mortgagor, although the homeowner may, if desired, exceed those minimum requirements, or terminate the coverage once the loan is repaid and the mortgage released.
The return-of-premium (ROP) concept has been applied by a few insurance providers within the field of life and health (that is, optional) insurance. Typically, the insured is given the option of purchasing a rider to a traditional insurance policy, with the rider including the ROP benefits. By purchasing the ROP rider, the customer is guaranteed the return of all insurance premiums paid provided that the policy is maintained for a set period, less the amount of any claims made during that period. While the overall amount of each premium payment is higher, the insured party may be encouraged to purchase optional insurance when the opportunity of a full return of all premiums paid is presented.
By way of example, the ROP rider on term life insurance may be seen as highly advantageous by the term life customer. Term life insurance typically has no cash value, and thus at the end of the term the customer receives no value in return whatsoever. The only way that a customer receives any return on his or her insurance premiums is if he or she dies during the insurance term. Whole life insurance, which in contrast to term life insurance does offer an investment component, is often disfavored by life insurance purchasers as too costly and complex. The ROP concept allows life insurance to be priced more like term insurance, but also offer a savings-like component similar to whole life insurance. One may consider, for example, a healthy 40-year-old man who wants a $500,000 death benefit. A simple term life insurance policy with a 30-year term might cost $900 per year, while the ROP rider on such a policy might increase the cost by an additional $350 per year. But this is far less than the cost of a whole life policy in this amount, which might cost around $3300 per year. If the insured lives until the end of the 30-year term, he or she would receive a refund of $37,500. To receive that high of a return by investing in stocks, bonds, or similar after-tax investments over the same 30-year period, the insured would need to ensure an average rate of return of about 8%. The potential advantages of the ROP rider for term life insurance policies are thus clear.
While the ROP concept has been successfully applied in the area of “optional” insurance, that is, life and health insurance, the inventors are not aware of any application of this concept within the field of property and casualty, that is, “required” insurance. One of the critical differences between these forms of insurance is that while the terms of a required insurance policy may (and typically do) change over the life of the policy, the terms of life insurance and similar policies do not change over the policy's lifetime. One of the primary reasons for purchasing a life insurance policy at an early date is to secure a set premium and benefit over a period of years. Any possibility for change in the premium or benefits would be seen as highly disadvantageous by the insured. By contrast, property and casualty policies often change their benefits, premiums, and even whether the insured will be retained under the policy, based on changing conditions of the insured. For example, the cost of automobile collision insurance is based partly on the value of the automobile, which will change when a vehicle is sold and replaced with a newer vehicle. The cost of automobile liability insurance is based at least in part upon the past accident history of the insured, and thus a series of accidents within a period of time may cause the cost of the insurance to rise significantly.
Since property and casualty policies may change in a much more fluid fashion than, for example, life insurance policies, application of the ROP concept to these policies presents challenges not faced in the field of life insurance. Specifically, applying the flat-rate rider fee for ROP riders from term life policies directly onto property or casualty insurance is not feasible because the variability of these policies may result in a policyholder paying either far too much or too little for the ROP benefit. The insured could not be guaranteed a return of his or her fixed premiums; the return would instead be a variable amount, and thus the benefit would appear more like a traditional financial investment in a fluid market.
Another problem faced in any attempt to apply the ROP concept in the field of property and casualty insurance is that, unlike term life policies, property and casualty insurance typically has a variable premium for a policy where there may never be a claim. The policyholder holds such policies for an indefinite time. For example, a policyholder may likely hold homeowners insurance until the policyholder's house is sold, and may hold automobile liability insurance until the policyholder buys or sells his or her automobiles. The date on which these events will occur generally cannot be predicted in advance, while a life policy has a definite claim event, i.e., the death of the insured. As a result, the simple expiration of the property and casualty policy cannot be used as the gauge of when a ROP benefit will be paid out if the ROP concept is to be applied to property and casualty insurance.
While traditional ROP concepts cannot be directly applied to insurance in the property and casualty field, the potential benefits of developing an ROP method for required insurance are significant. First, the insurer may benefit from an ROP rider for required insurance because it would encourage policy longevity and stability. The competition among casualty and property insurance providers has become increasingly fierce in recent years, and one result of this competition has been an increase in the ease with which policyholders may switch from one insurer to another. In addition, policyholders now have access to an unprecedented amount of information that they may use to compare the premiums of various insurance providers. As a result of these factors, policyholders are more likely now to switch insurance providers in response to even tiny premium increases or slight differences in premiums charged by competing companies. Frequent switching of insurers is very costly to the insurance providers, who must expend significant sums to process the policies of new insureds and close the files of those who switch to another provider. By instituting a ROP option for such insurance, the insurer would be providing an incentive to its policyholders to remain with the insurer even if a less expensive policy alternative may be available, since if the insurer switches insurance providers he or she could not take advantage of the end-of-term ROP benefit. Thus the cost of providing the insurance would fall overall as the insurer lowers its overhead costs associated with policyholder mobility. The cost savings of an ROP benefit could be collected by the insurer, passed on to the policyholder in order to offer more competitive rates, or split in such a manner that both the insurer and policyholder reap a cost savings.
Another potential benefit of applying the ROP concept to “required” forms of insurance is that the ROP benefit will serve as an incentive to the policyholder to limit the frequency and severity of claims. Under traditional casualty insurance, the policyholder has little if any incentive to reduce the size of a claim once the claim exceeds the policyholder's deductible. Consider for example an automobile damage claim in which some simple bodywork could be applied to repair an automobile at a cost of $1000, but complete replacement of damaged body parts would result in a repair cost of $3000. If the policyholder's deductible is $500, then the policyholder experiences the same cost regardless of which repair is chosen. The policyholder will thus likely insist on the full-replacement repair. If, however, the policyholder held a ROP rider, and thus knew that the amount of his or her claim might impact his or her ROP benefit at the end of the policy term, then the policyholder may be encouraged to authorize the less costly repair option, particularly for an older vehicle. As a result, the cost of claims may be again reduced by widespread application of ROP benefits in casualty insurance, and thus the cost of providing the insurance may decrease. Again, the insurer may collect the cost savings as additional profit, pass on these savings to the customer in an effort to offer more competitive premium rates, or split the cost savings as both profit and reduced premiums to policyholders.
In addition to the potential benefits to the insurer as explained above, which may be passed to the insured in the form of reduced premiums, an ROP benefit would also offer significant advantages to the insured. One study indicates that the odds of a particular insured having an automobile accident that results in damage greater than the value of the insured automobile is only 1 in 246. Likewise, the odds of a total loss event for a home under a homeowners insurance policy are only 1 in 1200. Yet millions of people pay insurance premiums for policies from which they will never in their lifetimes receive any payment or benefit, simply because they are required to hold these forms of insurance either by law or as a result of a lender agreement. By adding an ROP benefit to the insurance policy, the policyholder turns these odds in his or her favor, since the policyholder will most likely receive a full return of the premiums he or she has paid for the insurance. Under current tax laws in the United States, it is believed by the inventor that this return will be tax-free, and thus the ROP benefit should compare well against other low-risk investment opportunities that are approached with after-tax funds.
One attempts to achieve some of these benefits with respect to property and casualty insurance is disclosed in United States Patent Application Publication Nos. 2003/0135396, 2002/0077866, and 2002/0077868, each to Javerlhac. In the Javerlhac method, the policyholder is charged an initial sum set to an amount in excess of the cost of insurance. This excess is invested by the insurer to earn income, with reimbursement of a portion of the sum made after a period less the amount of claims during that period. In one version of this method, the return to the policyholder is made at a guaranteed minimum rate. In another aspect of the invention, the insurer may return the entire initial sum along with earned income if the policyholder has made no claims. In this way, this method may encourage the policyholder to limit or forego claims against the insurer. In still another version, a fraction of the earnings from the over-cost payment is used to pay a portion of the policyholder's premiums.
The Javerlhac method does not offer all of the benefits of a ROP benefit applied to required forms of insurance. Few policyholders would have available the significant up-front cash sum required in order to take advantage of the Javerlhac method. The Javerlhac method is, in essence, an investment coupled with an up-front insurance premium payment. The policyholder could achieve many, if not all, of the same benefits by simply purchasing standard property or casualty insurance, investing the difference in a relatively secure financial instrument, and paying all or part of the insurance premiums as they come due with the proceeds. By contrast, a ROP benefit does not offer the policyholder any return other than that of the face amount of premiums paid in. Those premiums are paid over the life of the policy, and the cost associated with the ROP rider are paid at the time of each premium payment. Thus the cost of the ROP benefit is held in check by the limited nature of the benefit. The ROP structure, however, may offer tax advantages under United States tax laws that are not available using the Javerlhac method.
What is desired then is a insurance method applicable to property and casualty insurance and related insurance forms that may incorporate a ROP benefit for the policyholder in a desirable insurance product. This desire is achieved by the present invention as explained below.